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Lecture 14Strategy Analysis And Choice
Lecture Outline
• The Nature of Strategy Analysis and Choice
• A Comprehensive Strategy-Formulation Framework
• The Input Stage
Lecture Outline
• The Matching Stage
• The Decision Stage
• Cultural Aspects of Strategy Choice
Lecture Outline
• The Politics of Strategy Choice
• The Role of a Board of Directors
Strategy Analysis & Choice
Whether it’s broke or not, fix it—make it better. Not just products, but the whole company if necessary.
-- Bill Saporito
Strategy Analysis & Choice
Strategic analysis and choice largely involves making subjective decisions based on objective information.
Strategy Analysis & Choice
The Nature of Strategy Analysis and Choice –
– Establishing long-term objectives– Generating alternative strategies– Selecting strategies to pursue– Best alternative to achieve mission and objectives
Strategy Analysis & Choice
Alternative strategies derive from –
– Vision– Mission– Objectives– External audit– Internal audit– Past successful strategies
Strategy Analysis & Choice
Participation in generating alternative strategies should be broad –
Strategy-FormulationStrategy-Formulation Analytical Framework
Stage 1: The Input Stage
Stage 2: The Matching Stage
Stage 3: The Decision Stage
Formulation Framework
External Factor EvaluationMatrix (EFE)
Competitive ProfileMatrix
Internal Factor EvaluationMatrix (IFE)
Stage 1:The Input Stage
Input Stage
• Provides basic input information for the matching and decision stage matrices
• Requires strategists to quantify subjectivity early in the process
• Good intuitive judgment always needed
Formulation Framework
SPACE Matrix
Stage 2:The Matching Stage
TOWS Matrix
BCG Matrix
IE Matrix
Grand Strategy Matrix
Matching Stage
• Match between organization’s internal resources and skills and the opportunities and risks created by its external factors.
Matching Key Factors to Formulate Alternative Strategies
Resultant StrategyKey External FactorKey Internal Factor
Develop a new employee benefits package
=Strong union activity (threat)
+Poor employee morale (weakness)
Develop new products for older adults
=Decreasing numbers of young adults (threat)
+Strong R&D (strength)
Pursue horizontal integration by buying competitor's facilities
=Exit of two major foreign competitors form the industry (opportunity)
+Insufficient capacity (weakness)
Acquire Cellfone, Inc.=20% annual growth in the cell phone industry (opportunity)
+Excess working capacity (strength)
Formulation Framework
SPACE Matrix
Stage 2:The Matching Stage
TOWS Matrix
BCG Matrix
IE Matrix
Grand Strategy Matrix
Matching Stage
TOWS Matrix
– Threats– Opportunities– Strengths– Weaknesses
TOWS Matrix
Develop four types of strategies
– Strengths-Opportunities (SO)– Weaknesses-Opportunities (WO)– Strengths-Threats (ST)– Weaknesses-Threats (WT)
SO Strategies
SO
Strategies
Use a firm’s internal
strengths to take advantage of
external opportunities
ThreatsOpportunitiesWeaknesses
Strengths(TOWS)
WO Strategies
WO
Strategies
Improving internal
weaknesses by taking
advantage of external
opportunities
ThreatsOpportunitiesWeaknesses
Strengths(TOWS)
ST Strategies
ST
Strategies
Using firm’s strengths to
avoid or reduce the impact of
external threats.
ThreatsOpportunitiesWeaknesses
Strengths(TOWS)
WT Strategies
WT
Strategies
Defensive tactics aimed at reducing internal
weaknesses and avoiding
environmental threats.
ThreatsOpportunitiesWeaknesses
Strengths(TOWS)
TOWS Matrix
Steps in developing the TOWS Matrix
1. List the firm’s key external opportunities2. List the firm’s key external threats3. List the firm’s key internal strengths4. List the firm’s key internal weaknesses
TOWS Matrix
Developing the TOWS Matrix
5. Match internal strengths with external opportunities and record the resultant SO Strategies
6. Match internal weaknesses with external opportunities and record the resultant WO Strategies
7. Match internal strengths with external threats and record the resultant ST Strategies
8. Match internal weaknesses with external threats and record the resultant WT Strategies
TOWS Matrix
WT Strategies
Minimize weaknesses and avoid threats
ST Strategies
Use strengths to avoid threats
Threats-T
List Threats
WO Strategies
Overcome weaknesses by taking advantage of
opportunities
SO Strategies
Use strengths to take advantage of opportunities
Opportunities-O
List Opportunities
Weaknesses-W
List Weaknesses
Strengths-S
List Strengths
Leave Blank
Formulation Framework
SPACE Matrix
Stage 2:The Matching Stage
TOWS Matrix
BCG Matrix
IE Matrix
Grand Strategy Matrix
SPACE Matrix
Strategic Position and Action Evaluation Matrix
Four quadrant framework Determines appropriate strategies
Aggressive Conservative Defensive Competitive
SPACE Matrix
Two Internal Dimensions Financial Strength [FS] Competitive Advantage [CA]
Two External Dimensions Environmental Stability [ES] Industry Strength [IS]
SPACE Matrix
Overall Strategic position determined by:
– Financial Strength [FS]– Competitive Advantage [CA]– Environmental Stability [ES]– Industry Strength [IS]
SPACE Matrix
Developing the SPACE Matrix:
• EFE Matrix• IFE Matrix• Financial Strength• Competitive Advantage• Environmental Stability• Industry Strength
SPACE Matrix
• Select variables to define FS, CA, ES, & IS• Assign numerical ranking from +1 (worst)
to +6 (best) for FS and IS; Assign numerical ranking from –1 (best) to –6 (worst) for ES and CA.
• Compute average score for FS, CA, ES, & IS
SPACE Matrix
• Plot the average scores on the Matrix• Add the two scores on the x-axis and plot
point on X. Add the scores on the y-axis and plot Y. Plot the intersection of the new xy point.
• Draw a directional vector from origin through the new intersection point.
SPACE Factors
Environmental Stability (ES)
Technological changes
Rate of inflation
Demand variability
Price range of competing products
Barriers to entry
Competitive pressure
Price elasticity of demand
Financial Strength (FS)
Return on investment
Leverage
Liquidity
Working capital
Cash flow
Ease of exit from market
Risk involved in business
External Strategic PositionInternal Strategic Position
SPACE Factors
Industry Strength (IS)
Growth potential
Profit potential
Financial stability
Technological know-how
Resource utilization
Capital intensify
Ease of entry into market
Productivity, capacity utilization
Competitive Advantage CA
Market share
Product quality
Product life cycle
Customer loyalty
Competition’s capacity utilization
Technological know-how
Control over suppliers & distributors
External Strategic PositionInternal Strategic Position
SPACE MatrixFS
+6
+1
+5+4
+3+2
-6
-5
-4
-3
-2
-1-6 -5 -4 -3 -2 -1 +1 +2 +3 +4 +5 +6
ES
CA IS
Conservative Aggressive
Defensive Competitive
Formulation Framework
SPACE Matrix
Stage 2:The Matching Stage
TOWS Matrix
BCG Matrix
IE Matrix
Grand Strategy Matrix
BCG Matrix
Boston Consulting Group Matrix
• Enhances multidivisional firms’ efforts to formulate strategies
• Autonomous divisions (or profit centers) constitute the business portfolio
• Firm’s divisions may compete in different industries requiring separate strategy
BCG Matrix
Boston Consulting Group Matrix
• Graphically portrays differences among divisions
• Focuses on market share position and industry growth rate
• Manage business portfolio through relative market share position and industry growth rate
BCG Matrix
Relative market share position defined:
• Ratio of a division’s own market share in a particular industry to the market share held by the largest rival firm in that industry.
BCG Matrix
Dogs
IV
Cash Cows
III
Question Marks
I
Stars
II
Relative Market Share PositionHigh1.0
Medium.50
Low0.0
Ind
ust
ry S
ales
Gro
wth
Rat
e High+20
Low-20
Medium0
BCG Matrix
• Question Marks • Stars• Cash Cows• Dogs
BCG Matrix
Question Marks
• Low relative market share position yet compete in high-growth industry.• Cash needs are high• Case generation is low
• Decision to strengthen (intensive strategies) or divest
BCG Matrix
Stars
• High relative market share and high industry growth rate.• Best long-run opportunities for growth and
profitability
• Substantial investment to maintain or strengthen dominant position• Integration strategies, intensive strategies, joint
ventures
BCG Matrix
Cash Cows
• High relative market share position, but compete in low-growth industry
• Generate cash in excess of their needs• Milked for other purposes
• Maintain strong position as long as possible• Product development, concentric diversification• If becomes weak—retrenchment or divestiture
BCG Matrix
Dogs
• Low relative market share position and compete in slow or no market growth • Weak internal and external position
• Decision to liquidate, divest, retrenchment
Formulation Framework
SPACE Matrix
Stage 2:The Matching Stage
TOWS Matrix
BCG Matrix
IE Matrix
Grand Strategy Matrix
Thank You
Lecture 15 Strategy Analysis And Choice
Grand Strategy Matrix
• Popular tool for formulating alternative strategies
• All organizations (or divisions) can be positioned in one of four quadrants
• Based on two evaluative dimensions:– Competitive position– Market growth
Quadrant IV
1. Concentric diversification
2. Horizontal diversification
3. Conglomerate diversification
4. Joint ventures
Quadrant III
1. Retrenchment
2. Concentric diversification
3. Horizontal diversification
4. Conglomerate diversification
5. Liquidation
Quadrant I
1. Market development
2. Market penetration
3. Product development
4. Forward integration
5. Backward integration
6. Horizontal integration
7. Concentric diversification
Quadrant II
1. Market development
2. Market penetration
3. Product development
4. Horizontal integration
5. Divestiture
6. Liquidation
RAPID MARKET GROWTH
SLOW MARKET GROWTH
WEAK COMPETITIVE
POSITION
STRONGCOMPETITIVE
POSITION
Grand Strategy Matrix
Quadrant I
• Excellent strategic position• Concentration on current markets and
products• Take risks aggressively when necessary
Grand Strategy Matrix
Quadrant II
• Evaluate present approach seriously• How to change to improve competitiveness• Rapid market growth requires intensive
strategy
Grand Strategy Matrix
Quadrant III
• Compete in slow-growth industries• Weak competitive position• Drastic changes quickly• Cost and asset reduction indicated
(retrenchment)
Grand Strategy Matrix
Quadrant IV
• Strong competitive position• Slow-growth industry• Diversification indicated to more promising
growth areas
Formulation Framework
Quantitative Strategic Planning Matrix
(QSPM)
Stage 3:The Decision Stage
QSPM
Quantitative Strategic Planning Matrix
• Only technique designed to determine the relative attractiveness of feasible alternative actions
QSPM
Quantitative Strategic Planning Matrix
• Tool for objective evaluation of alternative strategies
• Based on identified external and internal crucial success factors
• Requires good intuitive judgment
QSPM
Quantitative Strategic Planning Matrix
• List the firm’s key external opportunities & threats; list the firm’s key internal strengths and weaknesses
• Assign weights to each external and internal critical success factor
QSPM
Quantitative Strategic Planning Matrix
• Examine the Stage 2 (matching) matrices and identify alternative strategies that the organization should consider implementing
• Determine the Attractiveness Scores (AS)
QSPM
Quantitative Strategic Planning Matrix
• Compute the total Attractiveness Scores
• Compute the Sum Total Attractiveness Score
QSPM
Key Internal FactorsManagementMarketingFinance/AccountingProduction/OperationsResearch and DevelopmentComputer Information Systems
Strategy 3Strategy 2
Strategy 1
WeightKey External FactorsEconomyPolitical/Legal/GovernmentalSocial/Cultural/Demographic/EnvironmentalTechnologicalCompetitive
Strategic Alternatives
QSPM
Limitations:
• Requires intuitive judgments and educated assumptions
• Only as good as the prerequisite inputs
QSPM
Positives:
• Sets of strategies examined simultaneously or sequentially
• Requires the integration of pertinent external and internal factors in the decision-making process
Cultural Aspects of Strategy Choice
Culture:
• The set of shared values, beliefs, attitudes, customs, norms, personalities, heroes, and heroines that describe a firm
Cultural Aspects of Strategy Choice
Culture:
• Successful strategies depend on degree of support from a firm’s culture
Politics of Strategy Choice
Politics in organizations:
• Management hierarchy• Career aspirations• Allocation of scarce resources
Politics of Strategy Choice
Political tactics for strategists:
• Equifinality• Satisfying• Generalization• Focus on Higher-Order Issues• Provide Political Access on Important Issues
Role of A Board of Directors
Duties and Responsibilities:
1. Control and oversight over management2. Adherence to legal prescriptions3. Consideration of stakeholder interests4. Advancement of stockholders’ rights
Key Terms
• Aggressive quadrant• Attractiveness Scores (AS)• Board of Directors• Boston Consulting Group (BCG) Matrix• Business portfolio• Cash cows• Champions• Competitive Advantage (CA)
Key Terms
• Competitive quadrant• Conservative quadrant• Culture• Decision stage• Defensive quadrant• Directional vector• Dogs• Environmental Stability (ES)• Financial Strength (FS)
Key Terms
• Grand Strategy Matrix• Halo error• Industry Strength (IS)• Input stage• Internal-External (IE) Matrix• Long-term objectives• Matching• Matching stage• Quantitative Strategic Planning Matrix (QSPM)
Key Terms
• Question marks• Relative market share position• SO strategies• ST strategies• Stars• Strategic Position and Action Evaluation
(SPACE) Matrix• Strategy-formulation framework
Key Terms
• Sum total attractiveness scores• Threats-Opportunities-Weaknesses-
Strengths (TOWS) Matrix• Total Attractiveness Scores (TAS)• WO strategies• WT strategies
Thank You